Oracle Stock: ORCL Gets Lost in the Clouds

Q4 results weren't pretty for an already sluggish ORCL

Larry Ellison, Oracle’s (ORCL) co-founder and executive chairman, always loves to talk smack about his competitors, especially Salesforce.com (CRM), Workday (WDAY) and SAP (SAP). But so far this year, Oracle stock has done little to back up his words.

As seen with the latest Oracle earnings report, the company is getting hit by all sides from its rivals. The result is that Oracle stock continues to feel more and more pressure — down more than 8% in early trading on Thursday.

On the Oracle earnings call, co-CEO Safra Catz blamed the poor performance on the wild swings in the currency markets. Yet when looking at the results on a constant currency basis, revenues were still only up a measly 3%. In other words, Oracle stock appears to be facing fundamental issues.

After all, during the fiscal Q4 Oracle earnings report, the company missed on both the top and bottom lines. In fact, the problems were fairly widespread across the business. License revenues plunged 16.7% to $3.14 billion, and there was zero growth from software license updates and support. Then there was the hardware systems segment, which saw a 6% decline, while the hardware services division fell by 4.4%.

The worst part? Fiscal Q4 is generally the strongest period for ORCL.

What’s Weighing on Oracle Stock

So what’s going on here? ORCL is in the midst of a grueling transition to the cloud. The move has involved big changes to the core technology but also to the business model, with a focus on subscriptions.

On the earnings call, Catz did point out that the transition will ultimately be worth the present pain. To this end, she gave an interesting example: A $1 million license software deal may quickly bring in about $3 million in revenues (because of support and maintenance). By comparison, a similar cloud deal would not involve any upfront payments. However, the recurring revenues could add up to $9 million to $10 million over time.

That logic is why other traditional companies, like Microsoft (MSFT) and Adobe (ADBE), have seen strong gains from their moves to the cloud.

But in the case with ORCL, the company’s actions have been much more tentative — and pretty late in the game, which is why Oracle stock is stalling.

Now this isn’t to imply that the company is headed for a BlackBerry (BBRY) — style disaster. The fact remains that ORCL provides mission-critical technologies for hundreds of thousands of customers. It seems far-fetched that many of them will suddenly abandon the technology, especially given the substantial costs of making a such a change.

ORCL is actually a key supplier of software to cloud providers. On the Oracle earnings call, Catz indicated that companies like Salesforce.com purchase huge amounts of the company’s technology.

Yet ORCL still remains in neutral, in terms of top-line growth (which has been mostly flat for the past 12 months). More importantly, there are few signs that this will change anytime soon. And the valuation on ORCL stock doesn’t exactly scream bargain, either. The forward-price to earnings ratio is at about 15X — pretty much in line with SAP’s and MSFT’s.

So all in all, there is really no reason to jump into Oracle stock, despite all the trash talk from Larry.